Troubled Bear's $2bn dance with the dragon

Troubled Wall Street brokerage Bear Stearns is looking east to improve its battered fortunes through a $2bn alliance with a Chinese investment bank to explore financial opportunities in Asia.

Bear Stearns and Beijing-based Citic Securities are to invest about $1bn in each other in return for securities that will convert over time into equity stakes. The two firms will form a new company based in Hong Kong to offer capital markets services throughout the region.

Regulatory approval will be required on both sides and the deal is likely to raise questions from political quarters in America. Congressional figures in both main US parties have repeatedly expressed unease about economic inroads into America by "communist" China and by Arab nations perceived to be unreliable allies. Citic is ultimately controlled by the investment arm of the Chinese government.

Bear Stearns chairman Jimmy Cayne said the "groundbreaking alliance" gave the firm a "unique footprint in one of the world's fastest-growing economies".

Bear Stearns was the worst hit of Wall Street institutions by the summer's credit crunch and a 62% collapse in profits raised questions over its direction. Mr Cayne, 73, has been under pressure to seek external investment. Warren Buffett, Bank of America and Wachovia have been mooted as possible partners. British currency trading billionaire Joe Lewis last month snapped up a 7% stake for $860m.

Analysts' reactions to yesterday's announcement were lukewarm. Richard Bove, at Punk, Ziegel & Co, said: "I think, in all probability, Bear Stearns's problems will stay with it for some time and this deal does very little to solve them."

Bear Stearns's shares opened lower on doubts over the tie-up, though they quickly recovered and were up 1.1% to $117.50 by mid-morning.

Citic will buy securities that convert into a 6% stake in the US firm, with an option to take its holding to 9.9%. Bear Stearns's investment will give it 2% of the Chinese bank, with the opportunity to raise its stake to 7% over five years.

The joint operation in Hong Kong will be built around Bear Stearns's existing Asian operations. Citic will contribute a securities operation and pay Bear Stearns an undisclosed sum.